Starting a business in Canada involves understanding various regulations, one of which is collecting sales tax. Whether you’re selling products or services, knowing when and how to collect sales taxes is crucial for compliance. Here's what you need to know about sales tax as a startup in Canada.
Does My Business Have to Collect Sales Taxes?
In Canada, most businesses that provide taxable goods or services need to collect the goods and services tax (GST) or the harmonized sales tax (HST). The requirement kicks in once your total taxable revenues exceed $30,000 in a single calendar quarter or over the course of four consecutive quarters. If your sales exceed this threshold, you must register for GST/HST with the Canada Revenue Agency (CRA), however, there could be advantages to registering even if your sales are less.
GST vs. HST: What's the Difference?
The GST applies across Canada, but in certain provinces—New Brunswick, Nova Scotia, Newfoundland and Labrador, Ontario, and Prince Edward Island—provincial sales taxes have been harmonized with the federal GST. This combined tax is called the HST.
In provinces without HST (like Manitoba, Saskatchewan, and British Columbia), you may need to collect provincial sales tax (PST) in addition to GST. Alberta and the territories do not impose PST.
How to Register for GST/HST
Most businesses receive a GST/HST account number when they apply for a business number through the CRA. If you're doing business in Quebec, however, you’ll need to register with Revenu Québec for the GST.
Small businesses earning less than $30,000 in annual revenues aren’t required to register for GST/HST but can do so voluntarily. Registering may allow you to claim input tax credits (ITCs) for the GST/HST paid on your business expenses.
Understanding Taxable Revenues and Supplies
Your "total taxable revenues" are the global sales of all taxable goods and services by you and your associates. This includes zero-rated goods, which are taxable but at a rate of 0%, such as basic groceries and prescription drugs. Certain supplies, such as financial services, goodwill, and sales of capital property, are excluded.
Taxable supplies include any goods or services provided as part of a commercial activity that are subject to GST/HST.
Charging Sales Tax for Out-of-Province Customers
If you’re selling taxable goods or services to a customer in another province, you must charge the sales tax rate of the province where the customer is located. For example, if your business is in Manitoba and you ship goods to Ontario, you’ll charge the 13% HST because Ontario is an HST province.
If the customer comes to your location in Manitoba, you charge Manitoba’s provincial tax along with GST. The tax rate depends on the "place of supply" rule, which defines the location of the transaction.
Do I Need to Charge Sales Tax to Foreign Customers?
For customers outside Canada, sales tax rules differ. If you're selling goods or services to international customers, you typically don't need to charge GST/HST, as the sale is considered a "zero-rated" supply. However, if international customers purchase goods while physically in Canada, GST/HST and applicable provincial taxes usually apply. Some foreign customers may be eligible for tax rebates.
Do Service-Based Businesses Charge Sales Taxes?
Yes. If you're providing taxable services in Canada and your revenues exceed the $30,000 threshold, you must register for and collect GST/HST. The rules for service providers are the same as for those selling physical goods.
Do I Need to Charge Sales Taxes on Wholesale Orders?
Yes, even wholesale transactions are subject to GST/HST. The business buying from you is responsible for claiming input tax credits on their end. Wholesale sales do not exempt you from collecting applicable taxes.
What is an Input Tax Credit (ITC)?
As a registered business, you can recover the GST/HST paid on business-related purchases by claiming an input tax credit (ITC). When filing your GST/HST return, subtract your ITCs from the GST/HST collected from customers. If you paid more in taxes than you collected, you may be eligible for a refund.
Remember to keep detailed records of your purchases and invoices to support your ITC claims, as the CRA may request documentation for verification.
Navigating the world of sales tax is a key step in ensuring your startup is compliant and operates smoothly. To learn more about sales tax and accounting services for your business, contact Koroll & Company.
